Economic Updates
January 09, 2009
A More Protracted Recovery Looms Ahead Without Jobs
This has been a very unhappy year for workers
The December jobs report revealed
another massive 524k payroll decline. This
is a smaller decline than the (upwardly
revised) 584k November drop, but larger
than the 470k average decrease over the
last three months, and far steeper than
the 82k average payroll decline through
the first eight months of the year. In
other details, this report revealed a jump
in the jobless rate to 7.2 percent from
6.8 percent. The total workweek fell
0.2 hours to 33.3 hours, and although
average hourly earnings increased by 3.5
percent from a year ago, the increase was
down from 4.3% in November.
In another employment report offering
the first look at 2009, new claims for
unemployment for the week ending
January third, fell to 467k from 491k
of the prior week. While the past two
weeks of sub-500k prints are somewhat
positive, the numbers should be viewed
with caution because of strong seasonal
factors. One possible explanation is that:
there may be less firing after Christmas
simply because there was less hiring
before. Mounting continuing claims are
at a 4.6 million level, showing a significant
cut in new job opportunities.
Overall, the employment numbers confirm
an economy with downward momentum
and suggest sustained economic pain.
More importantly, the reports heighten
the need for policy action.
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Policy developments
The International Monetary Fund is on
board to prevent a global depression. At a
December 15th conference the IMF urged
countries to boost public spending as part
of a three-step program to include:
Fiscal measures to offset the abrupt fall in
private demand
n
A coordinated government intervention in
financial markets to get credit flowing and
support bank recapitalization (for example,
deployment of the second US$350-billion
tranche of Troubled Assets Relief Program-TARP funds)
n
Liquidity support for emerging market
countries to reduce the adverse effects of
the widespread capital outflows triggered
by the financial crisis
Bill Cheney
Chief Economist
617-572-9138
[email protected]
Oscar Gonzalez
Economist
617-572-9572
[email protected]
Rebecca Braeu
Economist
617-572-0868
[email protected]
In other events:
n
n
n
The world seems to be
responding on the fiscal side
According to the Institute of International
Finance estimates, over $1.7 trillion
(including $800 billion for the U.S.) have
been announced around the world.
In the U.S., the incoming Obama
administration has acknowledged the
urgency of government spending, despite
the huge fiscal challenge it will face even
without any additional spending.
There are few who question the need
for the huge stimulus package. However,
n
In the U.S. the ISM-services
composite index rebounded by
several points in December to 40.6,
with a broad-based recovery across
most of the major components.
While the overall index indicates a
further contraction in the services
sector during December, the
rebound is a positive sign.
F or some good news, the U.S.
construction
spending
report
revealed a surprisingly small 0.6
percent November drop that
followed material upward revisions
in September and October. The
upward adjustments imply a boost
in nonresidential construction to a
positive growth rate for Q4.
E urozone producer prices plunged
by 1.9 percent m/m in November
after falling 0.8 percent m/m in
October. November was the fourth
successive month of price declines.
However, the y/y increase in
producer prices only moderated to
3.3 percent in November, from 6.3
percent in October and a record 9.2
percent in July. This price data adds
to the widespread evidence that
inflationary pressures are retreating
sharply around the world.
Economic Updates
January 09, 2009
A More Protracted Recovery Looms Ahead... (Continued)
in light of an approaching Social Security and Medicare
fiscal time-bomb, the amount of spending raises major
risks in the future. The Congressional Budget Office (CBO)
projected this week that the federal deficit may balloon to
$1.2 trillion in 2009 even before any economic stimulus
package is approved. So the questions are: how long
can the U.S. continue to boost its debt? and can it do so
without distorting taxes, inflation and interest rates? But
whatever the answers, sooner or later taxpayers will need
to pay for the trillion-dollar deficits.
On the monetary side easing measures
are likely to continue
The U.S. Federal Open Market Committee (FOMC)
minutes from December 16th show that policy makers
are on edge about the severe contraction in economic
activity. As a result, the FOMC voted to cut the federal
funds target to a range near zero percent. The Committee
discussed its various balance-sheet programs, highlighting
areas of success and pressure points, and concluded that
the policy initiatives have been somewhat successful
in providing large quantities of liquidity to the banking
system. However, the minutes show that more work
will be needed. And the Committee directed its trading
desk to purchase GSE debt and agency-guaranteed MBS
in order to provide additional support to the mortgage
and housing markets. More importantly, the Fed will also
implement the Term Asset-Backed Securities Loan Facility
to facilitate the extension of credit to households and
small businesses and fulfill credit needs more directly.
In China, The People’s Bank of China reaffirmed an easy
monetary policy stance at its annual meeting, pledging to
maintain a stable growth of money supply and credit this
year. Money supply will grow at a pace 3-4 percentage
points higher than the GDP growth rate this year.
The Bank of England (BoE) on Thursday cut interest
rates to the lowest level since it was founded in 1694
as it attempts to ward off a prolonged recession. The
half point cut in interest rates to 1.5 percent shows the
BoE following the Fed’s aggressive interest rate cuts to
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fight worsening economic conditions. The BoE’s decision
widens the gap between Britain and the euro zone, where
the European Central Bank (ECB) also recently cut rates
to the current 2.5 percent. The ECB is now likely to lower
rates on January 15th.
In sum, when people lose their jobs, they tend to spend
less and fall behind on their debt obligations. Businesses
fear a fall in demand for their products and investors worry
that further declines in consumer spending will prolong
the recession. Although the markets’ economic worries
have been calmed a bit following the massive stimulus
proposals, volatility remains high as the real economy is
weighing on profit and default expectations. Investors face
a potentially high reward over the coming year, but there
is also a great deal of risk because the macroeconomic
prospects are highly uncertain.
Next week’s focus will be on inflation:
Consumer and producer prices will likely show m/m declines
in December. Retail sales and industrial production reports
will bring us another step closer to closing the books for
the horrible end of 2008.
Economic Updates
January 09, 2009
A More Protracted Recovery Looms Ahead... (Continued)
With unemployment still rising towards a new cyclical peak...
25.0%
7.0
20.0%
Correlation=0.8
Source: Economic Research
EU.P.010909.WC
-10.0%
Source: Economic Research
Personal Consumption
Yr/Yr
Jan-08
Wage
Yr/Yr
Jan-90
1/1/08
1/1/07
1/1/06
1/1/05
1/1/04
1/1/03
1/1/02
1/1/01
1/1/00
3.5
-5.0%
Jan-84
0
4.0
Jan-78
Unemployment
Rate (R)
Jan-72
2,000
0.0%
Jan-66
4.5
Jan-60
5.0
4,000
5.0%
Jan-54
5.5
Jan-48
6,000
10.0%
Yr/Yr
6.0
# Unemployed
workers (L)
3
15.0%
8,000
Unemployment Rate %
Number of Unemployed Workers (‘000s)
6.5
Jan-02
10,000
7.5
Jan-96
12,000
...consumer spending will remain weak until the job market
improves
Economic Updates
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January 09, 2009
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